-- We are affirming our 'BBB+/A-2' long- and short-term ratings on Heineken and removing them from CreditWatch negative.

-- The stable outlook reflects our view that Heineken will restore ratios of funds from operations to net debt and adjusted debt to EBITDA, including Standard & Poor's adjustments, of 25% and 3.0x, respectively, within 24 months.

Rating Action

On Oct. 2, 2012, Standard & Poor's Ratings Services affirmed its 'BBB+/A-2' long- and short-term corporate credit ratings on Netherlands-based brewer Heineken N.V. At the same time, we removed the ratings from CreditWatch, where we had placed them with negative implications on July 25, 2012. The outlook is stable.

Rationale

The affirmation reflects our assessment that Heineken's credit metrics, pro forma for the acquisition of Asia Pacific Breweries Ltd. (APB), will only temporarily and moderately deviate from our guidance for the rating and quickly recover thereafter. Heineken announced on Sept. 28, 2012, that shareholders of its joint-venture partner Fraser & Neave had approved Heineken's offer to acquire Fraser & Neave's interests in APB. We expect funds from operations (FFO) to net debt and debt to EBITDA, including our adjustments, of 25% and 3.0x respectively, within 24 months of closing of the mandatory general offer (MGO) that Heineken will have to launch on the remaining shares. The affirmation also factors in Heineken's track record of deleveraging post acquisition, as evidenced by the Scottish & Newcastle deal, and commitment to strong investment-grade credit ratings, with a commitment to return to a ratio of net debt to EBITDA (before exceptional items and amortization of brands and customer relations) of less than 2.5x within 24 months of the MGO.

We expect Heineken's adjusted debt-to-EBITDA ratio to reach 3.5x and adjusted FFO to debt to decrease to about 22.5% at year-end 2012, following the completion of APB's acquisition for a total consideration of EUR5.2 billion by our estimate, considering full subscription of the MGO. However, with a base-case scenario assuming mid-single-digit revenue growth, flat margins, and higher capital expenditure (capex) in 2013, our projections show Heineken's cash flow generation will remain strong. We expect annual FFO of about EUR3 billion, and free cash flow in excess of EUR1.5 billion annually over the next two years. We thus estimate Heineken's adjusted debt-to-EBITDA and adjusted FFO-to-debt ratio will be above 25% and below 3.0x, respectively, in 2014, with a significant improvement already in 2013. Our base case does not assume any significant acquisitions or share buybacks, but includes an annual dividend payment of more than EUR600 million.

We believe the acquisition will further support Heineken's "strong" business risk profile. We view the transaction as low-risk, given that Heineken manages APB and has been one of its major shareholders for more than 80 years. APB operates 25 breweries in 14 countries across Asia and the Pacific Islands with leading brands such as Tiger and Anchor, and the Heineken brand under license. We therefore think the consolidation of the Asian company will be another step toward diversifying Heineken's geographic footprint, and increase access to emerging markets' strong growth prospects.

Liquidity

At this stage, we view liquidity as "adequate," as our criteria define this term.

Financing of the acquisition is already secured through, as of Sept. 30, 2012, EUR1 billion of cash available, EUR2 billion of undrawn committed facilities, and a new bridge commitment of EUR2.5 billion. Moreover, we acknowledge Heineken's proven ability to tap the bond market and expect a rapid refinancing of the bridge commitment. Also, we assume still substantial discretionary cash flow of about EUR1 billion in 2013.

Regarding uses, we expect capex of EUR1.2 billion in 2012, and an annual dividend payment of more than EUR600 million. We also factor in uses of EUR5.2 billion for the acquisition of APB. As at June 30, 2012, short-term debt was EUR351 million, and debt due in 2013 was EUR1.3 billion.

Outlook

The stable outlook reflects the predictability of Heineken's operations, and its strong and proven deleveraging abilities. It factors in our expectations that the group's adjusted FFO to net debt will recover to the 25%-35% corridor and that adjusted debt to EBITDA will decrease below 3.0x in 2014, with already a significant improvement from year-end 2013.

Our base case assumes sales growth in the mid-single digits in the coming years and still sizable free cash flows despite higher capex. It does not incorporate any additional significant acquisitions. We could consider lowering the ratings if the company does not meet our deleveraging expectations in the expected timeframe.

The ratings have limited upside in the next 24 months as improvement of credit metrics will be gradual, in our view. We could consider raising the ratings if the company were to commit to a stricter financial policy, and notably sustainably report an adjusted debt-to-EBITDA ratio of below 2.5x.